What are the pros and cons of sending Rs1 crore by a PIO to my Indian relatives for business purpose as unsecured loan?

—Sanjib Chakraborty

A PIO can advance loan to a ‘person resident in India’ (not being a company) from his/her NRO account after satisfying the following conditions:

a) The loan should be on non-repatriation basis (no remittance possible outside India);

b) The loan amount should be received by the borrower either by inward remittance from outside India or by debit to NRO/NRE/FCNR(B) account of the lender;

c) period of loan should not exceed 3 years;

d) Rate of interest on the loan cannot be more than 2% above bank rate prevailing on the date loan was availed;

e) Repayment by the borrower should be made only to the NRO account.

There are general restriction on usage of borrowed funds. The person resident in India who has borrowed the funds in rupees from a PIO shall ensure that:

1. Borrowed funds are used only for his / her own business other than in: chit fund; Nidhi company; agricultural, plantation activities, real estate business or construction of farm houses; or trading in transferable development rights (TDRs)

2. Borrowed funds are not used for any investment, whether by way of capital or otherwise, in any company or partnership firm or proprietorship concern or any entity, whether incorporated or not, or for re-lending.

Accordingly, a PIO may advance a loan to his/her relative who is a person resident in India from his/her NRO account subject to fulfilment of the above mentioned conditions. The loan amount cannot be remitted outside India and the repayment should only be made to the NRO account.

I was an NRI from 2 June 2012 to 22 October 2017. Do I need to convert my NRE account to normal saving account immediately or I can wait for few months? What happens to my fixed deposits (NRE)? Do I need to redeem them can I let them mature? All my SIPs are debited from my NRE account. If I request CAMS to change my tax status, what will happen to my SIPs?

—Name withheld

Residential status under the exchange control laws is different from income-tax law. Under the exchange control law, you may qualify as a ‘person resident in India’ in the year of return to India with an intention to stay in India for an uncertain period.

Under the income-tax law, residential status is determined based on your physical presence in India in the current financial year (FY) (1 April to 3t March) and the preceding 10 FYs.

The response to your specific queries is as follows:

Under the exchange control law, non-resident (external) (NRE) account needs to be designated as resident account or the funds may be transferred to a resident foreign currency (RFC) account, at the option of the account holder, immediately upon change in residential status.

If you are returning to India with an intention to stay in India for an uncertain period, you would qualify as ‘person resident in India’ under the exchange control law. Accordingly, you are required to notify the bank of the change in residential status, to designate the NRE account to resident account or transfer the funds to an RFC account.

On subsequent change in residential status from ‘person resident in India’ to ‘person resident outside India’ you may re-designate the resident account to non-resident (ordinary) (NRO) account.

Upon change in the residential status, the NRE deposit account needs to be designated as resident deposit account or transferred to RFC account.

Interest earned on the NRE deposit account is exempt till the individual qualifies as ‘person resident outside India’, as per the exchange control laws. Once the individual qualifies as ‘person resident in India’ as per the exchange control laws, interest income from NRE deposit account is taxable in India.

Upon change in the residential status, a new demat account with ‘resident’ status will be opened and all the securities from the non-resident demat account will be transferred to the resident demat account.